Trade unions have been urged by Ed Balls, the shadow chancellor, not to fall into David Cameron's trap and stage a 1980s-style industrial relations confrontation. He warns that Cameron is counting on the unions to unleash a wave of strikes so that he can say the Labour movement wants to take Britain back to the 80s.

Balls also predicts that the government is planning in the budget to exempt businesses with 10 or fewer employees from an array of employment rights, including maternity and paternity rights. He says the deregulation will be presented as part of a growth strategy.

In an interview with the Guardian, Balls says: "They are boasting to business that the barriers to growth are not reckless spending cuts, but paternity and maternity leave. They are going to say in the budget that in order to get growth we have to dismantle the fair labour market that makes it possible to balance work and family life. It is ideological claptrap."

He also says he cannot see how Labour would be able to work with a discredited Nick Clegg after the next election.

Balls's call for restraint on strikes is remarkable, as he is seen to be close to the unions. There have been leftwing union calls for co-ordinated strike action this summer.

But he says: "The Labour movement mustn't walk into Cameron's trap. He wants to have that confrontation so that he can blame a difficult year, or even longer, on the trade unions and Labour taking Britain back to the 1980s. But it is David Cameron and George Osborne who want to take us back to the 1980s."

Balls highlights the parallels between now and the early 80s – unrest in the Middle East, increases in VAT, public spending cuts and a struggling economy. "We have been here before on economic policy and this is a period when Cameron thinks he can stand tough against the trade unions and a Labour movement acting for its narrow sectional interests.

"We have to be absolutely wise to that and not risk public support. We must do everything possible to defeat the government's arguments politically."

Balls and the Labour frontbench, including Ed Miliband, the party leader, will be on the demonstration against cuts being organised by the TUC for 26 March.

Praising the tactics advocated by the TUC general secretary, Brendan Barber, Balls says: "It is right that people demonstrate and march , but let us expose David Cameron as the man that is taking us back to the confrontation and division that many people say scarred our country."

He also predicts that the police, facing cuts to their working conditions, will not be willing to be used politically as they were under Margaret Thatcher. "In the 80s the police were caught in the middle and politicised overtly against their best interests and desires of policing. Now that the police are so much in the eye of the storm from the Conservative-Liberal Democrat coalition, I find it hard to see that the same thing will happen again."

Discussing next week's TUC march, he says: "There will be lots of people from the Labour frontbench and MPs marching, but the important thing is that the leader of the Labour party will be there addressing the crowd."

Balls acknowledges that despite Labour's poll lead – which he describes as deceptive – the coalition has succeeded in persuading the public of the need for cuts during its early months in office.

"We are behind on the argument on the deficit. It will take time to turn this round. My task is to rebuild Labour's economic credibility, but that won't happen in a week or a month.

"We can't go around saying a limitless amount of money will solve every problem and we have to be disciplined about spending. We have to win the argument that we are not the people that drove the car into the ditch – actually the world drove into the ditch and but for the action we took we would be in the ditch now.

"The new government had a honeymoon when it could set an agenda , Labour was fighting a leadership election and we were on the back foot. But that's changing fast. It was hubristic of Cameron and Osborne to believe their own political rhetoric about Britain being out of the danger zone before any of the impact of their decision affected the economy."

Balls says a big drop in the value of the pound in the last three years has boosted UK exports, but the non-trading side of the economy – including large parts of the services sector – is being affected by a loss of confidence before the "crushing of demand" from Osborne's austerity programme.

"When rhetoric is not matched by reality, people start to say, 'Maybe these guys don't know what they are doing, and maybe Mervyn King was right when he told the US ambassador before the election that Cameron and Osborne were callow.'"

Balls is scathing about Clegg, who he says has to justify the Liberal Democrat U-turn on the economy by blaming Labour for the need to make spending cuts.

"Clegg looks an increasingly desperate, shrill and discredited politician, losing both public and party support. People think that if Clegg says something, it cannot be the truth. The Liberal Democrats need to have some real hard thinking about what they stand for."

He says it would be impossible for Labour to govern with Clegg after the election, arguing: "I don't see how Nick Clegg could change direction again with any shred of credibility, or how he could work with Labour now, but that is not true of Liberal Democrats more widely."

Balls praises Miliband's leadership, saying he has made the big calls. He concedes: "In retrospect it would have been better if Gordon Brown had stood against Tony Blair [in 1994]. We might not have had some of what subsequently happened.

"This time we had a leadership election and it has been done. Ed won and I did not win. David Miliband is not in the shadow cabinet. We are now the future and we are getting on with it."